In committing to an unemployment rate below 5 per cent, the government is abiding by the old political axiom: only set targets that you already know you can meet. Because, putting aside another major outbreak of COVID-19, it seems certain that’s where we are heading.
Why am I so confident? Three reasons.
First, there is a massive amount of stored up stimulus yet to affect the Australian economy.
Look at households. From the March to December quarters in 2021, gross disposable income increased by 2.9 per cent. Yet consumption fell by 1.2 per cent. While some of the 4.1 per cent increase in savings that therefore occurred may stay as savings, you have to think that a decent proportion is going to be spent.
Then look at businesses. Profit figures suggest they are awash with cash. Take the example of accommodation and food services. Everyone knows it was hard hit by COVID-19 – and the figures bear this out. Sales were down 16 per cent in 2020 compared to the average of 2017-19. But less well known is what happened to profits – Gross operating profits in accommodation and food services increased by 67 per cent and profits per dollar of sales doubled in 2020 against the average of the previous three years.
The same pattern is seen across most industries – and in recent work I have shown that the rise in profits by industry in 2020 is pretty much explained by government payments via the Job Keeper and the Boosting Cash Flows to Employers programs. In one way or another these higher profits from 2020 will find their way into spending, continuing the stimulus to economic activity.
Second, some time soon hiring is going to catch up with the most rapid period of new job creation Australia has seen, and when that happens, it will further reduce unemployment. Had the vacancy rate been at its long-run average level in February, rather than at a record-high, I estimate that the unemployment rate would have been 5.3 per cent rather than the actual rate of 5.6 per cent.
Third, the Budget handed down this week will provide additional stimulus – both directly, and indirectly via effects on confidence.
There will, of course, be forces pushing in the opposite direction, slowing the time it will take to get the rate of unemployment below 5 per cent. Of immediate interest, the ending of Job Keeper is likely to have caused a temporary slow-down in jobs and employment growth. While not straightforward to interpret, my reading of numbers from the ABS Payroll series released this week suggest that the ending of Job Keeper may have caused the number of jobs to fall by about 1 per cent.
Another moderating influence over the medium term will be growth in labour force participation – due to the strength of the labour market and government policies to promote participation. But these factors don’t seem sufficient to reverse the momentum towards a lower rate of unemployment.
The fact that we are well on our way to a rate of unemployment below 5 per cent has important implications for policy. Rather than asking how do we get there, we need to be thinking about what to do when we get there.
Just getting the rate of unemployment down to the NAIRU – estimated at 4.5 to 4.75 per cent by the RBA and Treasury – will not be adequate. Studies that estimate the NAIRU are always careful to acknowledge that it is estimated imprecisely. Yet policy-makers (at least in Australia in the 2010s) then treat the NAIRU as a sort of truth – a barrier that, should it ever be crossed, would bring havoc to the economy.
Policy based on a genuine understanding of NAIRU estimates would be willing to experiment with pushing the rate of unemployment to lower levels – stopping if we see that the rate of inflation is threatening to accelerate excessively. My own work, for example, has estimated that, due to the rise of under-employment in Australia, our target rate of unemployment should be 1 percentage point lower today than 25 years ago. And then there are other structural changes in the labour market – such as reduced worker bargaining power – that mean it should be even lower.
We are going to get the rate of unemployment below 5 per cent. But the costs of unemployment – in lower GDP and a more uneven distribution of income – don’t stop at the NAIRU. We should be even more aggressive therefore in testing how low we can get the rate of unemployment in Australia.